Thursday, 12 May 2016

The Rate of Interest - Part 2 of 4

The rate of interest is the market price of loanable money-capital, or as stated above the price of the use value of capital, the use value of being able to produce the average profit. As Marx states, this means that capital itself, or the use value of capital, which cannot be obtained without buying the capital, becomes a commodity. But, it is not like other commodities. It is, in this respect, like land. Land, under capitalism, also becomes a commodity, which is bought and sold, and which has a market price, which is determined by its ability to produce rent.

But, neither land nor capital are products, neither are produced by labour, and consequently neither has a value. Moreover, land and capital are related, because the price of land is its capitalised rent, which depends not just on the rent, but on the average rate of interest.

For every other commodity, the market price, fluctuates around a central point, determined either by the commodity's value or its price of production. Under pre-capitalist commodity production, the market price revolves around the commodity's exchange value/price, and under capitalism it revolves around the price of production. The reason for this is quite simple. If we take the price of production, it is the cost price of the commodity plus the average rate of profit. If, demand for this commodity rises, and the supply does not rise to meet it, the market price of the commodity will rise. 

This may be a temporary phenomena. For example, the demand for ice cream may be high this week due to a heatwave, but will be lower than average next week, as its replaced by cold, wet weather. So, these short term fluctuations will tend to average out. However, the change in demand might be permanent, for example, arising from a change in fashions. In that case, the higher demand would cause the market price to stay high, and would then mean that the rate of profit in this sector would rise above the average. But, the consequence of that would be that the producers of this commodity would increase their production to take advantage of the greater profits, and other producers would enter production for the same reason. So, then the supply of this commodity would rise, and the market price would then fall back to be equal to the price of production. The same would be true in reverse, if demand were to fall, permanently. 

Similarly, if some new technology arose that increased productivity, so that the cost of production fell, if sellers continued to sell at the same market price, they would again make above average profits. So again, they would increase their output, and supply would rise so that market prices again fell until only the average profit was being made, and vice versa. The answer to the question that orthodox economics cannot answer, of why the equilibrium price for any commodity is x, rather than y, is provided by precisely this fact, of the value or, now the price of production of the commodity.

But, capital has no value, because it is not the product of labour. So, it has no cost of production or price of production either. There is no objective central point around which the market price can revolve. If the demand for capital rises, this may cause the price of capital, the rate of interest to rise, and higher rates of interest would be expected to encourage an increased supply of capital, but unlike any other commodity, there is no objective basis for determining how high the rate of interest would have to rise, to establish equilibrium, because there is no price of production for capital, no natural price or rate of interest. However, as Marx says, outside specific conditions of crisis, when firms need money-capital, at almost any price, simply to pay bills and stay afloat, there are objective limits within which the rate of interest is constrained.

The owner of money-capital will not sell it for free, any more than the owner of any other commodity will give it away. The owner of money-capital will seek to sell it for the highest price they can obtain for it, in the market. But, similarly, the buyer of money-capital, outside a crisis, only seeks to obtain it, so as to metamorphose it into productive or commodity capital, depending upon whether they are a productive or merchant capitalist. If the average rate of profit, is 10%, the productive or merchant capitalist will have no reason to borrow money-capital at a 10% rate of interest, because that would wipe out their profit, and they only engage in business to make a profit. So, the minimum for the rate of interest is set at zero, and its maximum is set at the average rate of profit.

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